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WORKSHOP ON MARKET DESIGNS FOR LOW-CARBON ELECTRICITY GENERATION

SUMMARY:
Today, the defining challenge of electricity markets in Europe and elsewhere is to ensure progressive decarbonisation of power supplies while guaranteeing high levels of security of supply at affordable costs. However, under the present design of European electricity markets there is little chance of less carbon-intensive generation forthcoming based on the basis of market prices. Not only are prices low for all generators, but low carbon generation technologies such as wind, solar, nuclear, hydro, carbon capture and storage but also ancillary technologies such as electric storage or energy efficiency, are characterized by high capital intensity.

The resulting high fixed costs increase financial risks for investors facing volatile prices. This puts low carbon technologies at a competitive disadvantage in liberalised energy-only markets. In principle, this disadvantage could be partly compensated by appropriate carbon prices. However, carbon prices in the EU ETS hovering below € 10 per tonne of carbon are clearly insufficient to make low carbon technologies competitive in combination with prices on current energy-only markets. With few exceptions, the deployment of low carbon technologies is thus dependent on national arrangements that allow for out-of-market finance with guaranteed rates for the electricity they produce.

This is an inefficient and haphazard manner to promote decarbonisation with complex and unpredictable outcomes. In the absence of both coherent conceptualisation and dedicated policy pronouncements, the proliferation of ad hoc support mechanisms also seriously undermines the integrity, transparency and efficiency of the common European electricity market.

The issue has naturally generated wide-spread interest among electricity market experts and academic researchers. Since about two years also a number of studies have been initiated that not only provide an analysis of the shortcomings of the process of overlaying market outcomes with targeted interventions but also provide proposals for alternative market designs on a coherent and transparent basis.

The Chaire European Electricity Markets (CEEM) of the Université Paris-Dauphine has thus invited a number of leading researchers and authors of recent studies to present their proposals aiming to establish new market frameworks that would allow low carbon technologies to substitute progressively for fossil fuel-based power generation. The debate is no longer whether the current framework is able to produce satisfactory outcomes on its own. Permanent meddling has shown that it is not. The challenge is now to identify the elements that can be part of a coherent and transparent European market design for low carbon electricity generation in the future.